5 teen retail trends that could boost your portfolio

Predicting the next big thing among youths is nearly impossible, but choosing good investments in the teen-retail sector doesn't have to be as difficult.

By TheStreet Staff Nov 3, 2011 11:59AM

Image: Woman looking at mannequins in boutique, smiling © Michael Hitoshi/Digital Vision/Getty ImagesBy Lindsey Bell, TheStreetTheStreet

 

The back-to-school season was a success for most retailers, a sign finicky teens are still spending. But which clothing and accessories retailers are worth investing in?

 

Despite teenage unemployment at a staggering 24% (compared with the national average of 9.1%) and rising prices, young people are willing to spend on new, must-have things like denim jeans and phones. That means teen retailers are competing for dollars against not just one another but also other types of retailers, such as Apple (AAPL).

 

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October retail sales reported Thursday showed deterioration from the back-to-school season. Still, retail stocks, as measured by the S&P 500 Retail Index, increased 8% during the month, historically one of the worst to own retail stocks. Only November fares more poorly.

 

Holiday sales are the next catalyst for the group, making November a good time to buy retail stocks. But there are winners and losers in the trend-heavy industry, so picking companies whose fashions are adored by teens is key.

 

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Determining the next hot trend for teenagers is nearly impossible. But picking good investments in the teen-retail sector doesn't have to be as difficult -- just use the cheat sheet below.

 

Abercrombie & Fitch (ANF) is the category leader. The company has been taking share from other teen retailers hand over fist, benefiting from the introduction of promotions in domestic stores. The opportunity for Abercrombie lies in its U.S. operating margins, which are well below historic levels. Fashion trends are becoming more accommodating to the brand, which will help sales and margins. Still, turmoil in Europe will be a headwind, given half of the company's revenue comes from overseas. I'll be waiting for an improvement in the eurozone's debt situation before I get involved in this stock, which has jumped 29% this year.

 

American Eagle (AEO) has rebounded in the past few months, but the stock is still down 11% so far this year. Sales momentum has continued through the fall after a solid back-to-school season, prompting an increase in earnings guidance. Changes to the assortment of merchandise are resonating well with customers, a good sign heading into the holidays. This is a stock that has the potential for fast upside as the company wins back customers over the next few months.

 

Aeropostale (ARO) has had its share of problems over the past year or so, and the stock price reflects that: minus 45%. Operating margins at the teen retailer have been eroded significantly, and sales declines have become the norm. The opportunity at these low levels is certainly enormous, and the company is making changes to merchandise and finding more efficient ways to operate. The stock isn't expensive, but I would wait until a turnaround in sales is more apparent before buying this one.

 

Premium denim brand True Religion (TRLG) reported stellar earnings yesterday with same-store sales up 10.3%. This is a classic case of the high-end consumer faring better than the average American. An improved product offering and sales effort in the U.S. is boosting business. International growth is also on fire, with a new distribution agreement signed in China. Given the momentum, I would consider adding the stock to my portfolio even though it's up 48% this year.

 

Japanese retailer Uniqlo opened not one, but two, global flagships in New York City in October, proving the company is serious about expanding in the U.S. market. The chain, often compared to The Gap (GPS), offers casual basic apparel, which isn't necessarily flying off shelves as sales at The Gap have struggled for some time now. With Uniqlo operating only three stores in the U.S., it will take time to see if the company has the recipe for success. Uniqlo is owned by Fast Retailing, which is traded on the Tokyo Stock Exchange.

 

2Comments
Nov 3, 2011 2:30PM
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If you don't boycott black friday BUY AMERICAN! And buy from those that support American employees. There are websites committed to identifying our shining stars. Do some homework and make a difference where it matters.

 

Nov 3, 2011 2:08PM
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No to Black Friday!!!!!!!!!!!!!!!!!!
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